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S&P: Debt Downgrade Analysis Was 'Objective'

Pushing back against the White House's angry response to its downgrade of U.S. credit, Standard & Poor's said it refused to be manipulated by the government.

08.07.11 1:14 AM ET

Treasury Disputes U.S. Downgrade

An intense back-and-forth has started between the U.S. Treasury and Standard & Poor's, after the rating agency downgraded the nation's credit rating for the first time in 70 years. A senior Treasury official told China's Xinhua news agency that S&P's "analysis is poorly and hastily done," and acting assistant secretary for economic policy, John Bellows, also lashed out at the agency on a blog post. Prior to Bellows’ comments, S&P staunchly defended its decision Saturday, saying the downgrade analysis was "objective."

Warren Buffett: S&P Erred

Billionaire Warren Buffett not only thinks that Standard & Poor's shouldn't have downgraded the United States' credit rating—he thinks there should have been a promotion. Buffett told Bloomberg Television that S&P was wrong when it dropped the U.S. from AAA to AA+, and the nation merits a "quadruple A" rating. The Berkshire Hathaway chairman also tried to restore confidence in the markets after last week's drastic sell-off on Wall Street, saying: "Financial markets create their own dynamics, but I don't think we're facing a double dip recession."

S&P: Downgrade Analysis 'Objective'

Standard & Poor’s is defending its decision to strip the U.S. of its top credit rating. A blog on the Treasury’s website said the decision was “based on a $2 trillion mistake.” In an interview, S&P president Deven Sharma said there was debate over which discretionary-spending projections the firm should use in its decision, but it eventually used the projections that Treasury officials requested. Sharma said, “There was a change in assumption, but the dynamics of the near term and the medium term are still the same: The debt trajectory will continue to increase.” He added that the Obama administration’s resistance is “the same you would get from any other country or company. We are supposed to be objective, and others are always trying to convince us why the risk is less than we think it is.”

White House Blames Downgrade on 'Divisive' Debt Deal

Responding to Standard & Poor's downgrade of the United States' credit rating, White House Press Secretary Jay Carney issued a statement calling for Republicans and Democrats to unite to fix the economy. He called the debt deal a “step in the right direction,” but said the debate “took too long and was at times too divisive.” Carney also pointed out that President Obama called for a “grand bargain” that would have reduced the deficit by $4 trillion, but that Republican leaders foundered. Standard & Poor's cited both the small size of the debt deal and the partisan deadlock around it as reasons for the downgrade.

State and local governments, already under pressure from the debt-ceiling deal, could find themselves in an even tighter spot because of the credit downgrade. Local governments that have the federal government as their backer of last resort could find their own credit ratings downgraded as a result of Standard & Poor's move, making it more expensive for them to borrow. However, it's unclear what effect the downgrade will have if the other two rating agencies preserve the government's AAA rating.

Paul Krugman lashed out at Standard & Poor's for having the gall to downgrade the United States after giving subprime-backed securities AAA ratings. Not that the U.S. isn't in trouble—the radicalism of the antitax Republicans jeopardized the United States' solvency, he writes. But the S&P's focus on near-term deficit reduction doesn't make any sense. Its insistence on a $4 trillion reduction instead of $3 trillion would make no difference in the long term. “So what was S&P even talking about? Presumably they had some theory that restraint now is an indicator of the future—but there’s no good reason to believe that theory, and for sure S&P has no authority to make that kind of vague political judgment.”

Standard & Poor's might not have the best track record—after all, it rated mortgage-backed securities AAA, which contributed to the recession and the explosion of U.S. debt—but it's right this time, writes Ezra Klein. The United States did in fact come very close to defaulting on its debts. If politicians are willing to risk default, then U.S. debt isn't completely free of risk. Perhaps, he wonders, the business community is finally realizing it needs a functioning political system and is exerting a countervailing force. “If not, then this may be the first of many downgrades to come.”

Robert Reich focuses on the other part of S&P's rationale, that the deficit-reduction plan reached by Congress “falls short” of what it thinks is necessary. “Pardon me for asking, but who gave Standard & Poor’s the authority to tell America how much debt it has to shed, and how?” asks Reich. It's S&P's job to reflect the likelihood we'll repay our debt, not mandate policy. We didn't default, and we don't risk defaulting until the end of 2012, when Congress votes once again on the debt ceiling. S&P's intrusion is especially ironic, writes Reich, because if the rating agencies had done their job and warned investors how much risk Wall Street was taking on, the government wouldn't have had to spend its way out of a recession.

Leonard Burman looks at the silver lining of the credit downgrade. The U.S. will be all right, he says, because everyone else is so much worse off. The United States' credit might be seen as slightly riskier than it was last week, but Europe is in even more trouble. “In fact, the growing financial crisis in Europe has resulted in a 'flight to safety' keeping yields on Treasurys very close to zero,” he writes. If President Obama plays his cards right, he might even be able to use the downgrade as a “wake-up call.” Burman proposes using the impetus of the downgrade plus the threat of not extending the Bush tax cuts to push through a package that promotes job creation and reduces the deficit.

The downgrade is bad news for Asia, where many countries have been running large trade surpluses with the United States and reinvesting the profits in U.S. government bonds. Japan, the second-largest creditor to the U.S. after China, said it stands by the United States and won't alter its investment policies. A senior official at the Bank of South Korea was more cautious, saying it would have to monitor the market impact. Hong Kong's government and central bank said they would also be monitoring the market, but that the downgrade was “within market expectations.”

The response of China, the United States' largest creditor, has been the harshest yet. In a statement through the official news outlet China News Agency, the government demanded that the U.S. “live within its means” and “cure its addiction to debts.” It also called for “substantial” cuts to the “gigantic military expenditure and bloated social welfare costs” in order to prevent future downgrades. “China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets," the statement read.

Europe's reaction has been comforting. French, British, and Russian officials expressed confidence in the United States' credit and said they won't review their U.S. investment policies, with France going so far as to join the Obama administration in questioning Standard & Poor's reasoning. Privately, Britain seems to be patting itself on the back for maintaining its own AAA rating. Sources in the Treasury tell the BBC that its austerity measures have been “vindicated” by the United States' downgrade.

Republican presidential candidates didn't wait long to start blaming President Obama for the downgrade in the United States' credit rating. Mitt Romney and Jon Huntsman piled on first, saying Standard & Poor's move was the result of reckless spending and economic decline. Michele Bachmann joined in, calling on Obama to force Treasury Secretary Timothy Geithner to resign. Newt Gingrich, Rick Santorum, and Tim Pawlenty also said the president was responsible for the downgrade.